Delhi Cloth And General Mills Co. ... vs Commissioner Of Income Tax
1992 Latest Caselaw 269 Del

JUDGMENT

B.N. Kirpal, J.

1. The Income-tax Appellate Tribunal, in respect of the assessment year 1965-66, has referred the following four questions law

"1. Whether, on the facts and in the circumstances of the case, the sum of Rs. 12,500 paid as contribution to the Indian National Congress is an allowable deduction under the Income-tax Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the amount of Rs. 90,771 was an expenditure incurred wholly and exclusively for the purposes of the assessed's business ?

3. Whether, on the facts and in the circumstance of the case, the Tribunal was correct in law in upholding the order of the Appellate Assistant Commissioner allowing only Rs. 1 lakh out of Rs. 1,14,249 being the payment to outgoing members of the Employees' Provident Fund Trust out of the assessed's contributions and interest thereon from November 1, 1952, till July 28, 1954 ?

4. Whether, on the facts and in the circumstances of the case, the Tribunal was legally right in holding that the expenditure of Rs. 35,621 incurred for running DCM Foot Ball Tournament was an admissible deduction under the Income-tax Act, 1961 ?"

2. As far as the first question is concerned, the facts found by the Tribunal are that a donation of Rs. 12,500 was given by the assessed to the Congress Party. The Income-tax Officer held that the said expense was not allowance and it was also not entitled to any rebate under section 88 of the Income-tax Act, 1961. The Appellate Assistant Commissioner as well as the Tribunal, in further appeal, did not allow the said expense. The Income-tax Appellate Tribunal followed its earlier decision in respect of the assessment year 1958-59 while disallowing the said expense.

3. Question No. 1 has to be answered in favor of the Revenue for the reason that, in the assessed's own case, viz., Delhi Cloth and General Mills Co. Ltd. v. CIT [1980] 125 ITR 96 (Delhi), disallowance of the contribution to a political party was upheld. To the same effect are the decisions reported as Delhi Cloth and General Mills Co. Ltd. v. CIT [1985] 156 ITR 649 (Delhi), Delhi Cloth and General Mills Co. Ltd. v. CIT [1986] 158 ITR 64 (Delhi) and Delhi Cloth and General Mills Co. Ltd. v. Addl. CIT [1986] 160 ITR 857 (Delhi).

4. As regards question No. 2, the facts found by the Tribunal are that the assessed had an inaugural function of its units called Shriram Vinyl and Chemical Industries. The total expenses incurred on the inauguration came to Rs. 1,24,310 and the break-up of this expense is as follows :

Rs.

Advertisements in papers                         23,250
Stores and wages                                 45,606
Hire charges of furniture                        13,630
Tents and shamianas                              12,936
Entertainment                                    10,289

Other miscellaneous expenses                     17,899
                                               --------
                                               1,24,310 
                                               --------
 

5. The Income-tax Officer allowed the advertisement expenses while the assessed claimed the entertainment expenses as allowable only to the extent permissible under section 37 of the Act (sic). A sum of Rs. 90,771 was disallowed. This amount represented the expenses incurred towards stores and wages, hire charges of furniture, tents and shamianas and other miscellaneous expenses including the charges for invitation cards. The Income-tax Officer came to the conclusion that these expenses were capital in nature and were, therefore, not allowable as a revenue deduction. The Appellate Assistant Commissioner, in appeal, agreed with him and held that the expenses were of preliminary nature. He also observed that a scrutiny of the expenses would show that they were either in the nature of entertainment or incurred in relation to ancillary work. The assessed filed a further appeal to the Income-tax Appellate Tribunal. The Tribunal, on the facts, came to the conclusion that the said expense was incurred for the purpose of the assessed's business with a view to obtain publicity for its project. In arriving at this conclusion, if followed the decision of the Bombay High Court in the case of ACC-Vickers Babcock Ltd. v. CIT (1976) 103 ITR 321.

6. In our opinion, the decision of the Tribunal cannot be faulted. As noted by the Tribunal, the assessed-company has started production in the soda plant on March 16, 1963. The production in the calcium chloride plant started on December 26, 1963, and the polyvinyl chloride plant started production on January 27, 1964. The inauguration was held after the said plants had been set up. The inauguration was some time in April, 1964. It is clear, therefore, that the inauguration had nothing to do with the commencement of production of the said units. Under no circumstances could the said expenses be regarded as a capital or preliminary in nature. Even the details of the expenses clearly indicate that it is only a sum of Rs. 10,289, which was incurred towards entertainment. The decision of the Bombay High Court in ACC-Vickers' case [1976] 103 ITR 321 is in pari materia. In that case, the assessed claimed deduction of a sum of Rs. 2,78,619 which had been spent on the inaugural function of the company's heavy engineering works at Durgapur at the hands of the then Chief Minister of West Bengal. The Appellate Tribunal took the view that the said expenditure was incurred wholly and exclusively for the purpose of the assessed's business, but came to the conclusion that a sum of Rs. 36,446, out of the aforesaid amount had been incurred by way of entertainment expenditure and, as such, the same could not be allowed as a deduction. This is for the reason that this sum of Rs. 36,446 related to bills for lodging and boarding of guests in hotels and catering charges for the guests. This finding of the Tribunal was approved by the Bombay High Court. It is true that the reference was only in relation to the sum of Rs. 36,446 which had been incurred by way of entertainment expenditure but what is important to be noted is that the rest of the amount which was allowed by the Appellate Tribunal was not challenged by the Department. When the figures indicated in the books of account of the assessed are not disputed, then, it cannot be contended that any sum in excess of Rs. 10,289 was spent towards entertainment. The company has a number of units in various parts of the country and it is quite obvious that it was with a view to gain publicity that the inaugural function was held even though the production of the new units had already commenced. A case more apposite on the point is that of Hindustan Commercial Bank Ltd., In re [1952] 21 ITR 353 (All). In that case, the bank had incurred expenses in opening 46 new branches. A sum of Rs. 89,870 represented salary, dearness and other allowances, tax on salaries, postage, etc. Another sum of Rs. 24,675 represented charges for advertisement, entertainment, photos and invitation cards. The said sum of Rs. 24,675 was held by the Tribunal to be in the nature of capital expenditure. On a reference being made, the Allahabad High Court reversed the finding and came to the conclusion that the said expenses of Rs. 24,675 incurred in connection with the inaugural functions of the branches and sub-branches of the bank were in the nature of revenue expenditure and were admissible as deductions under section 10 of the Indian Income-tax Act, 1922, which is equivalent to section 37 of the 1961 Act.

7. In view of the fact that the Tribunal has clearly come to the conclusion that the said expenditure of Rs. 90,771 had been incurred with a view to obtain publicity for its project, it must follow that the said expenditure was allowable as a revenue deduction.

8. As regards question No. 3, in respect of the assessment years 1968-69 and 1969-70, the claim of the assessed had been allowed by the Income-tax Officer only for a sum of Rs. 1 lakh. This order was upheld by the Income-tax Appellate Tribunal. On a reference being made at the instance of the assessed, this court, in CIT v. Delhi Cloth and General Mills Co. Ltd. [1981] 127 ITR 11, came to conclusion that limiting the allowance only to Rs. 1 lakh was not justified (sic). A special leave petition against the said decision of this court was dismissed by the Supreme Court reported as 142 ITR (St) 3. It is clear, therefore, that the Revenue authorities were not justified in upholding the allowance only up to Rs. 1 lakh.

9. As regards question No. 4, in respect of the earlier assessment year 1953-54, a claim of the assessed had been upheld by the Income-tax Appellate Tribunal. The reference of the Department was decided against it in CIT v. Delhi Cloth and General Mills Co. Ltd. and Addl. CIT v. Delhi Cloth and General Mills Co. Ltd. [1983] 144 ITR 275 (Delhi). Following the said decisions, this question has also to be answered in favor of the assessed.

10. For the aforesaid reasons, question No. 1 is answered in favor of the Revenue while questions Nos. 2, 3 and 4 are answered in favor of the assessed.

11. There will be no order as to costs.